Test Index

Time Value of Money

Question : 7 of 99

Marks: +1, -0

A company pays

16\%

Solution:

Concept:

Effective annual rate accounts for compounding within the year.

Explanation:

Nominal rate

= 16\%

per annum, compounded half‑yearly.

Half‑yearly rate

= \frac{16}{2} = 8\% = 0.08

Effective annual rate

= (1 + 0.08)^2 - 1 = 1.1664 - 1 = 0.1664

As a percentage,

0.1664 \times 100 = 16.64\%

Write

16.64

as a fraction:

16.64 = \frac{1664}{100} = \frac{1664 \div 16}{100 \div 16} = \frac{104}{6.25}

? Better:

16.64 = \frac{1664}{100} = \frac{416}{25}

. Multiply numerator and denominator by 25:

\frac{416 \times 25}{25 \times 25} = \frac{10400}{625}

Answer:

\frac{10400}{625}

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